Legal Department Strategy: Are you Right-Sourcing?
Lawyers are often great strategists. And corporate and government legal departments typically intimately understand the enterprise strategy of the organisations they support. So it’s somewhat of an anomaly that legal departments have not traditionally been strong at developing their own strategy beyond being the company’s trusted legal advisor. This is changing as legal departments continue to respond to the ‘more with less’ paradigm and be introduced to new technology and different types of service providers that change the way in which legal services are delivered. Legal departments are waking up to the fact that they need their own department-focused strategy. And if there’s just one thing above all else to focus on in setting a legal department strategy, it’s ensuring that the right type of work is being executed by the right internal and external resources.
A framework to segment work
Whilst law is a centuries old profession, most of the growth in corporate legal departments has taken place over the last three decades.
Over that time the basic resourcing choice for legal departments has been to either service legal work internally or send it to external law firms. Factors that play into the internal counsel vs law firm choice include internal skill-sets, capacity and risk appetite. Today the decision is a less binary one. Over the past few years greater alternative legal service providers have emerged. Different labour models have provided more options to serve clients. New legal technology solutions pop up every week. With the greater number of options comes a need for a more thoughtful and nuanced strategy for making resourcing decisions.
The driver behind growth of in-house legal departments has been enterprises realising
that a quality legal department can be a source of competitive advantage in the market. Furthermore certain types of work, especially higher frequency work, can be executed more efficiently, from a time and cost perspective, when done in-house rather than sent to law firms. It makes sense therefore that the main focus of legal departments should be high volume, strategically important work.
Consider the below 4x4 matrix where the horizontal axis measures work frequency and the vertical axis measures work value and complexity. Based on the logic above, the top right quadrant is the natural domain for legal departments.
High value and complex, top left quadrant work, that occurs less frequently, is not work for which it stacks up to build internal bench-strength. This is where it makes most sense to engage traditional law firms.
The bottom left quadrant reflects lower value, less strategic work, less frequently occurring. This work is at the very least distracting for the legal department, if not for the organisation more generally. Reducing, if not eliminating, this work should be a strategic priority.
Perhaps the biggest opportunity for a legal department is to execute the work in the bottom right quadrant differently. This is legal work that occurs in high volumes and is required to be done by the legal department but where it may not make sense to deploy highly paid, highly skilled in-house lawyers and where it certainly makes no sense to send to high cost law firms. This is the playground for alternative legal providers. ‘Alt law’ businesses, or Law Companies as some prefer to be known today, have to date been largely fueled by a labour arbitrage model with cheaper lawyers often located in lower cost offshore jurisdictions. But a small yet swiftly increasing part of this quadrant is also being solutioned by new legal technology tools. Identifying work to be done more effectively through alt law will be one of the key differentiating factors between successful legal departments of the future and those at the back of the pack.
Please note that it’s highly unlikely work in a legal department will be distributed evenly across all four quadrants. It’s also unlikely any two legal departments will have the same distribution. We would also expect the work in the bottom-half to be dwarfed by the top half. Revenues of alternative legal service providers today represent only a few percentage points of the entire legal market. However, as legal departments develop more sophisticated strategies we can expect the bottom right quadrant to grow relatively rapidly. It’s also worth pointing out that for each of the quadrants there will be areas of overlap and exceptions but as a general rule this framework should apply for all legal departments.
Technology is your friend
Whilst this all makes sense in theory, in practice how do we identify what work sits in which quadrant? One way to do this is to ask in-house lawyers to keep time sheets. Time sheets are often toxic to in-house lawyers many of which cite being allergic to time recording as a key motivation for moving in-house. A less offensive exercise is a once-off activity recording exercise across the team. A downside of this is that it may soon be out of date and it still relies on subjective data entries to inform insights.
Increasingly legal departments are looking for technology to provide this type of data. The legal technology landscape has exploded over recent years and there are countless tools for a myriad of different problems. Legal departments need to separate legal technology into two buckets. On the one hand are the many specific point solution tools that solve a particular problem very well, whether it be AI document review, complex workflow automation or invoice forensics to name a few examples. On the other hand is the foundation layer legal operating system. This system will manage every element of a digital legal workflow (i.e. intake, triage, matter management, document/contract management, knowledge management and vendor/spend management) and then integrate with the point solution legal tech tools as well as with key enterprise software. Critically the foundation layer legal operating system will then provide data and insights about what type of work is being done and by whom across the in-house legal team as well as by external legal providers. Out of the data produced by the operating system, resourcing decisions within the 4x4 matrix can now be made.
A common mistake for legal departments is to focus on tools without having the foundation layer in place. The shortcoming of this approach is that no matter how well a specific tool performs, it will not be able to solve for the parts of the end to end legal process for which the tool has no application.
The bottom right quadrant
Optimising resourcing decisions for bottom right quadrant work is a relatively new concept and as such there are few rights and wrongs as to how to approach it. Some legal departments will build full in-house capability powered by legal technologists, automation experts and an army of paralegals. Others will decide this work is non-core and outsource the lot. Some will take a mid-way approach.
And for the work being sent to alternative providers the decision making doesn’t stop with whether to outsource or not. How that work is done also involves a range of considerations. Are alternative providers engaged to do specific parts of a job to be stitched together by a law firm or the on-house team? Or is the intention to create a fully integrated end to end legal outsourcing, potentially offering multi-functional capability along with other corporate support services? Or somewhere in between?
Again, there is no one size fits all and the strategic choices need to be well thought through. Keeping front of mind the benefits of considering these choices at all is imperative. Cost reduction must be a key driver. A legal department that executes well should expect at least between 15%-30% saving across the volume of work in this quadrant. But savings in not the only benefit there is also simplification, standardisation, risk management better client and customer service and the Productivity Dividend.
The Productivity Dividend
So if one of the key outcomes is material cost reductions across the bottom right quadrant the natural follow on question is what to do with these savings. One option is to reduce the size of the legal department and/or reduce legal spend on traditional law firms. For some legal departments budget reductions have already been demanded and managing the bottom right quadrant is a key way to manage to these new circumstances. However there are other considerations a future focused legal department should give to realising these new savings. Using freed-up resources to move up the value chain by focusing on new areas of value adding work should be at the top of the list. Taking time to be more proactive about adding new value as opposed to reactively treading water will appeal to most in-house legal leaders. Who for example in your organisation is thinking about your future contract management strategies and how in particular new technologies like smart contracting and blockchain are going to play a critical role? Shouldn’t the legal department at least be playing a key role shaping if not managing this space? There are plenty of other examples of value adding future work for which legal departments need to free up time and resources by better managing the bottom right quadrant work.
Convincing stakeholders that the legal department should be taking on new responsibilities to add new value to the business is no simple task. These are unchartered territories where the legal team will have no previous track record. Business cases will need to be developed, trust will need to be established and goodwill drawn upon. Measuring baselines and producing data to show quantifiable change is crucial. These skills have not typically been a major feature of legal departments’ tool boxes. It can be argued however that not exploring these opportunities is the riskier strategy. Without a plan to unlock new value, the future of the legal department is inevitably a smaller, more efficient but ultimately less impactful one. This is not an environment that will inspire and retain our young and ambitious legal talent of the future, let alone maximise shareholder and stakeholder value.
Optimising resourcing decisions, or right sourcing is one of the most important levers for legal departments of the future to set themselves for success.
To make the right resourcing decisions a legal department must invest in its own strategic roadmap, change programs and foundation layer legal operating technology to provide the data about what work is being done and where and by whom.
Measurement of savings, value added and liabilities avoided is key for understanding what return on investment legal departments and the enterprises they support receive from these initiatives.
The end goal should not just be about cost savings and reduced headcount, the Productivity Dividend should at least partially be used to reinvest in activities that will add new value to the organisation in the future.
In order to realise savings and deliver new value consider a partner that can stitch together different services and technologies and provide end to end process ownership and accountability in areas where the legal department does not have bench strength today.
About the Author
Mick Sheehy runs PwC’s Australian NewLaw practice, focussed on providing strategic consulting, technology and outsourcing solutions to legal departments. Mick is a recognised international leader in the field of legal innovation and transformation, having won numerous international legal innovation awards and with his work the subject of a case study for Harvard Law School.
Mick founded and chaired the Corporate Legal Operations Consortium Australia, an industry body established to share best practice legal operations and innovation knowledge.